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US April jobs report - weak job growth, strong wages – and a turn in the USD outlook to more negative

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US April jobs report - weak job growth, strong wages – and a turn in the USD outlook to more negative                           

  • USD: The US economy adds just 266K jobs in April, well below the 1mln consensus (and Citi at 1.15mln) and the previous month is also revised down from 916K to 770K. Average hourly earnings advance a sharp 0.7%MoM but the unemployment rate unexpectedly rises to 6.1% with the participation rate up to 61.7%. Citi analysts think the report looks to be out of step with a variety of data showing a rapid rebound in economic activity and the report seems to represent a difficult-to-disentangle confluence of issues with seasonal adjustment, supply-side constraints and reallocation across sectors. Nevertheless, Citi analysts admit that the weak headline reading now raises the probability of the Fed delaying tapering beyond the December meeting though the team still retains their base case of taper to commence in December (for now).
  • USD: Implications for USD – a clear turn to a more negative outlook Overall, the April jobs report raises the risk that Fed policy stays dovish for longer and inflation rises further. Citi analysts outline 2 alternative scenarios for USD – (1) a strong US recovery reflected in solid job gains over Q2 would likely see further gains in UST 10Yr nominal yields towards 2.0 – 2.5%, with gains led by real yields – ie. US exceptionalism drives USD sustainably higher; OR (2) higher UST nominal yields but driven by rising inflation expectations instead of real yields while the Fed refuses to blink in the face of higher realized inflation – a clear headwind for USD.  
  • USD: Markets deliver their verdict Judging from Friday’s price action, it seems markets now favor scenario (2) for a weaker USD – the broad based USD Index (DXY) drops more than 70 pips while UST nominal yields initially head lower (UST 10yrs declines 10bps to 1.4640%) in a reaction to the much weaker headline jobs number but yields subsequently back up as the session progresses to close Friday’s session with the 10yrs unchanged at 1.5770%, as the market reacts to the inflationary impact of the rise in average hourly earnings.  
  • USD: Bottom line The price action suggests the trend towards higher UST nominal yields remains but is likely to now be led by building inflationary pressures in the US economy than expectations for real growth. This matters for USD as the Fed’s refusal to “blink” in the face of higher inflation pressures by potentially delaying its taper beyond December to 2022 potentially lays out a scenario for a steeper UST curve driven by rising inflation expectations and creating the backdrop for a weaker USD.  

 

RBA May Statement on Monetary Policy (SMP) and Deputy Governor Debelle’s message

  • AUD: RBA SMP - faster economic growth but ongoing spare capacity and little additional inflation pressure – RBA revises up its Australian GDP growth forecast to the end of 2021 by a meaningful 1.25pp to 4.75%. The economic pick-up implies labor market capacity being absorbed a little more quickly, hence revisions lower to the unemployment rate. But the unemployment rate still remains above the central estimate of full employment which is 4%. Outcomes for underlying inflation and wages also remain subdued. Wage growth is expected to pick-up over the coming year, but the average wage growth for most firms is expected to remain below 3%.
  • AUD: RBA Deputy Governor Debelle – ample room to buy more bonds but may not extend duration of YCC (yield curve control) - there is still ample scope for the RBA to purchase government bonds without creating market dysfunction. This suggests the RBA can influence financial conditions including the exchange rate by grossing-up the Bank’s balance sheet further. Citi analysts continue to expect a third LSAP (asset purchase) program of up to $AU100bn to be announced, most likely following the July Board meeting. But the risk now is that the Bank does not roll forward purchases onto the Nov-24 bond and extend YCC - Deputy Governor Debelle notes that market pricing suggests that the cash rate would be higher in 2024 than the Bank’s current forward guidance. However, the Bank isn’t too concerned as “overall funding costs for banks remain at historic lows”. This suggests that even if financial conditions are tighter because of market pricing, the Bank may decide to not necessarily push against it by rolling forward to the Nov-24 bond, and thereby extending its forward guidance and YCC even further. Citi analysts also admit that the likelihood for the RBA to now roll forward to the Nov-24 bond and extend YCC is now lower compared to start of the year especially given the Deputy Governor’s comment last week that the Australian economy has turned out much better than expected and that the RBA may consider their peers’ policies when reviewing QE3 The next two labor force surveys for April and May, prior to the July decision will prove crucial.   

 

Canada’s April employment shows effects of new lockdowns     

  • CAD: Canadian employment falls by 207.1k jobs in April and below consensus for -150k. The unemployment rate also rises to 8.1% from 7.5% while the participation rate declines to 64.9%. But the drop in April employment is largely expected and reflects new lockdowns throughout the month. Citi analysts still expect gradual re-openings and job gains in the June employment report to keep the BoC on track to taper the pace of QE purchases again in July.    
  • CAD: One notable aspect of the April employment report is a 2.7% drop in hours worked. While not surprising given new lockdowns, this does suggest a potentially larger contraction in April GDP than experienced during the months of the winter lockdown. However, Citi analysts still expect overall positive GDP growth for Canada in Q2. The team also expects the June employment report released ahead of the July BoC meeting will likely show strong job gains to support the BoC further slowing its pace of asset purchases in July to C$2 billion per week.                          

 

Week Ahead – US inflationary indicators the key to watch                   

  • USD: Fed speak this week - Fed’s Evans Discusses Economic Outlook; Fed’s Williams speaks at SOFR Symposium; Fed Governor Brainard Discusses US Economic Outlook; Fed’s Daly Speaks at Community Bankers Event; Fed Governor Clarida Discusses US Economic Outlook; Fed’s Waller Discusses US Economic Outlook; Fed’s Bullard Discusses the US Economic and Policy Outlook and Fed’s Kaplan Takes Part in a Moderated Discussion
  • USD: US CPI MoM – Citi: 0.2%, median: 0.2%, prior: 0.6%; CPI YoY – Citi: 3.6%, median: 3.6%, prior: 2.6%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 2.4%, median: 2.3%, prior: 1.6% - With inflation now on the radar as the key US data to watch, Citi analysts expect a solid 0.301% increase in core CPI in April but would not be surprised by an even stronger increase that rounds to 0.4%. More persistent increases in shelter prices would be a sign that underlying inflation pressures are picking up and core PCE inflation above 2%YoY can be sustained through 2022.
  • USD: US Retail Sales – Citi: 0.6%, median: 1.0%, prior: 9.7%; Retail Sales ex Auto – Citi: 0.4%, median: 1.0%, prior: 8.4%; Retail Sales ex Auto, Gas – Citi: 0.3%, median: 2.1%, prior: 8.2%; Retail Sales Control Group – Citi: 0.2%, median: 1.0%, prior: 6.9% - Citi analysts expect a 0.6% increase in retail sales in April. Sales in the retail control groups should rise 0.2%.
  • USD: US Industrial Production – Citi: 0.2%, median: 1.3%, prior: 1.4%; Manufacturing Production – Citi: -0.8%, median: 2.5%, prior: 2.7%; Capacity Utilization – Citi: 74.5%, median: 75.3%, prior: 74.4% - Citi analysts expect the largest subset of manufacturing production to decline by 0.8%, reflecting various supply constraints that have turned more binding in April, suggesting shortages could last for longer into next year. With demand overall likely remaining strong, supply shortages could increasingly prove to be inflationary.
  • USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.2%, prior: 1.0%; PPI Final Demand YoY – Citi: 6.0%, median: 5.8%, prior: 4.2%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.3%, prior: 0.7%; PPI ex Food, Energy YoY – Citi: 3.7%, median: 3.7%, prior: 3.1%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.4%, median: 0.3%, prior: 0.6% - Citi analysts expect a solid 0.4% increase in PPI final demand and a similar increase in the core measures. Citi analysts expect details of April PPI to be supportive of a solid monthly increase in core PCE that will lead the Y/Y reading to rise above 2% this month.
  • USD: University of Michigan Consumer Sentiment – Citi: 88.7, median: 90.0, prior: 88.3; University of Michigan 1Yr Inflation Expectations – Citi: 3.5%, median: xx, prior: 3.4% - The most important aspect of the May University of Michigan consumer survey however will be inflation expectations for 1-year ahead but particularly long-term expectations for 5-10 years ahead. This consumer inflation expectations measures is one closely watched by the Fed, and a return towards higher levels would be an additional sign of possibly building inflationary pressures.

 

Week Ahead (continued) – non-US data/ events this week

  • EUR: German ZEW Expectations, May: Forecast: 79.0, Prior: 70.7; ZEW Current Assessment, May: Forecast: -43.0, Prior: -48.8 – a month on from April, Germany’s vaccination campaign has accelerated significantly and new infections are falling steadily and the economy and financial markets are proving increasingly resilient to the lockdown. Potential for downside surprises though could come from the political side and semiconductor shortages.
  • EUR: Bank of France Business Sentiment, April: Forecast: 106, Prior: 105 – Citi analysts look for another gain in manufacturing sentiment to a 45-month high of 106 in April. Anecdotal evidence indicates that confidence is rising despite the latest lockdown, including in the service sector. Given the much lower degree of sensitivity of economic activity to changes in mobility and restrictions, the risks to the forecasts are probably to the upside.
  • GBP: UK GDP First Quarterly Estimate, 1Q: Forecast: -1.5% QQ, 4Q: 1.3% QQ; GDP Monthly Estimate, March: Forecast: 1.9% MM, Feb: 0.3% MM – Citi analysts expect UK GDP data for March to indicate a strong start to what is likely to be a robust GDP rebound over Q2. Citi analysts also expect a sharp rebound in April as stronger business confidence feeds through into a more rapid improvement across supply chains. The key uncertainty however, is on trade and expect the first quarterly assessment to suggest a marked hit to trade owing to the transition to new post-Brexit trading arrangements. Citi analysts expect the recovery in imports to prove more rapid from here than that in exports through the rest of 2021 – this would likely be a drag on sterling.
  • AUD: Australia will deliver the 2021 Federal Budget on Tuesday night - the budget will likely show an improvement in the bottom line thanks to parameter variation following better than expected economic outcomes. Normally not a currency mover but the Treasurer continues to see the budget being used as a tool to promote a sustained recovery, including driving the unemployment rate lower rather than as a means to reduce gross and net debt as a share of GDP.
  • CAD: Speech by BoC Governor Macklem – Citi analysts do not expect much change in messaging from the April BoC meeting. The speech will likely express optimism over the upcoming recovery. Citi analysts continue to expect the next adjustment to QE purchases to come at the July meeting, as gradual re-openings should be underway and the June employment report is likely to show job gains following weaker readings in April and May.
  • CNH: China CPI (%YoY) April: Citi 1.0, Consensus 1.0, Prior 0.4; PPI (%YoY) Citi 6.8, Consensus 6.5, Prior 4.4 - CPI inflation may climb to 1%YoY and PPI inflation might jump to 6.8%YoY in April. Services seem to be emerging out of the recent COVID-19 wave and might see modest price inflation. In the industrial space, the PMI indexes of purchasing price and producer price have moderated by -2.5ppt to a still elevated 66.9 and 57.3, respectively. The rally in commodities continues, resulting in upward price pressures in sectors like energy, chemicals, and base materials. And PPI inflation of -3.1%YoY in April 2020, sets a deeply low base.   

 

This is an extract from the Daily Currency Update, dated May 10, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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